An online retailer must decide if it should insource or outsource its Web site m

Question

An online retailer must decide if it should insource or outsource its Web site maintenance. The company estimates that 5,000 hours per year will be needed to maintain its Web site. To insource maintenance requires $41,000 in fixed costs per year and $35/hour in variable costs. Quotes from suppliers show that Web site maintenance can be outsourced for $40 per hour.

a. Compute the total annual cost for insourcing and outsourcing the maintenance.

b. Which option would you prefer?

Explanation / Answer

If the website maintenance is outsourced, total cost of maintenance

= $ 40/ hour x 5000

= $200,000

If the website maintenance is insourced , total cost of maintenance for 5000 hours

= Fixed cost + variable cost / hour x 5000 hours

= $41,000 + $35 x 5000

= $41,000 + $175,000

= $216,000

Thus ,

Cost of maintenance if outsourced ( $200,000) < Cost of maintenance if insourced ( $ 216,000)

Hence Outsource option should be preferred

WE WOULD PREFER OUTSOURCE OPTION

WE WOULD PREFER OUTSOURCE OPTION

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